A Cheap, Diversified, Mortgage-Backed-Securities ETF

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Vanguard Mortgage-Backed Securities ETF(VMBS) provides market-cap-weighted exposure to AAA rated U.S. agency mortgage-backed-securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae. This fund is one of the lowest-cost options in the intermediate-government Morningstar Category. It has tightly tracked the Bloomberg Barclays U.S. MBS Float Adjusted Index since its 2009 inception. The fund's cost advantage, the makeup of its benchmark, and Vanguard's index-management expertise are likely to produce attractive risk-adjusted returns relative to its peers over a full market cycle, underpinning a Morningstar Analyst Rating of Silver.

This fund delivers a higher yield than most of its peers that invest in agency MBS because of its relatively larger investments in Fannie Mae- and Freddie Mac-issued mortgage bonds. Unlike Treasury bonds, these bonds are not explicitly guaranteed by the U.S. government, and they offer higher yields than Treasuries with a comparable term. The fund's investments in Fannie Mae- and Freddie Mac securities represented roughly 70% of the portfolio as of March 2017. The rest of the portfolio is invested in Ginnie Mae securities, which are guaranteed by the U.S. government. The fund focuses on residential mortgage bonds even though it is part of the intermediate-government category, which encompasses funds investing in all sorts of government-related debt.

Phillip Yoo, CAIA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.